Cold comfort

7 min read

Friday turned into a massive day for risk assets as markets decided that the Trumpian threats of tariffs and trade wars were to be eaten less hot than they had been cooked and that in the end, somehow, all will be well in the garden.

The Dow ended the week the best part of 1,000 points above where it had set out on Monday and even the FTSE, generally such a heap of misery, added around 150 points though it is still or 7% - 550 points or so - below its January high.

There is a host of indices where one can find “risk on” appetite returning. A week ago last Friday, the iTraxx Crossover index peaked at 281.28 but by Friday it had fallen to close at 254.60. Over the same trading period, the VIX index had fallen to 14.64 from 21.57. Panic over?

In my book, not quite. What is clear is that over the past years running short positions – or underweight risk, if one is a benchmark hugger – has been costly and as I observed last week, long is the new neutral. But then again the central banks remain caught between a rock and a hard place. They missed the opportunity to normalise monetary policy while that had the chance; in as much as they stuck to their belief in the NICE (no inflation, constant expansion) economy of the pre-financial crisis period was the reward for their prudence rather than being due to the omnipresent influx of cheap Chinese consumer goods and misguided loose monetary policy, so they are also convinced that the current economic recovery is solely due to NIRP, ZIRP and lots of QE. What influence those three cousins might have had on the recovery is a moot point but one cannot ignore the fact that the great recovery, as strong as it might appear, is built on a rapid expansion of debt, both public and private, and that any significant shift in the debt and debt interest payment dynamics could rapidly undermine the great growth story.

We find ourselves back where we have been at many points since the 2007/2008 collapse, namely that the economic bear position is to be long the market and the bull position is to be short. If one believes that growth is robust and ongoing, the rates will have to rise and any assets prices on a discounted cashflow model will need to be repriced to the downside whereas if one had doubts in the growth dynamics one can bank on the monetary authorities erring on the side of caution, policy-wise, and there are good reasons to remain long. Confused? If you’re not, then you’ve clearly missed the point. I suddenly feel a bit like Alan Greenspan with his famous comment, something along the lines that if you think you’ve understood what I just said, then you clearly weren’t listening…

Aviva la vida

Meanwhile one of the oldest and most valued principles of the City has finally been buried, namely that my word is my bond. For as long as that has been said, the repost has also been that when in doubt it’s better to take the bond. Now Aviva, once known as Norwich Union, has kicked even that principle into touch. I understand that Aviva has let it be known that it intends to end the life of its irredeemable preference share. As it happens the prefs in question pay coupons ranging from 7.85% to 8.875% and although they may look like very expensive money now, when they were issued the price was more than just fair and investors were happy to hang their tails out of the window to take the risk.

But how does one redeem an irredeemable bond? It’s simple. One cancels it. Legally that might be possible on the grounds that a change in the way in which preference share capital is to be treated in future nixes many of its benefits but cancelling rather than launching an “at the market” buyback or at least offering investors a period during which they can tender their bonds “at the market” is, for lack of any other description, disgusting. Most of the UK’s insurers’, banks’ and building societies’ prefs, or permanent interest bearing shares (PIBS), are held by private investors and Aviva can live with the thought that the modern habit of setting minimum increments in the bond market at 100,000 pounds, euros or dollars means that they will next to never again have to appeal to the kind of private buyers they are about to leg over. They will also be quite aware that the memory of investors with respect to questionable behaviour makes that of a goldfish look long. The days when an issuer could gain an expensively bad reputation disappeared when issuing in enough size and having one’s issue in the index was enough to oblige even reluctant investors to “ship’em in and strap ‘em on”.

The City generally – there have always been rotten apples in the barrel – knew the difference between ethical and legal. Just because there is a way to redeem an irredeemable bond doesn’t make redeeming it right. If we have reached the point where corporate civility is to be sacrificed for the benefit of the annual bonus of the lawyer who has found a loophole, which could save Aviva £40m a year in interest payments that it promised to pay willing investors in perpetuity, then I must ask myself how long it will be before we’ll be obliged to give up our personal trainers and replace them with personal lawyers.

End bit

Finally, old bitcoin, apparently the bane of Mark “the Magician” Carney’s life, looks to have overcome the November/December madness and the January/February hangover and is returning to within its longer-term channel. At the time of writing it was trading at US$9,595, still US$300 or so outside of its expected target range but it does look as though the fun is over and it is set to return to a steady appreciation trend. The story doing the rounds at the moment is that the SEC is looking at regulating the trading platforms, which in turn would enforce proper AML and KYC practices. That would make huge sense, bringing the users of cryptocurrencies into the light rather than pursuing Carney’s rather idiotic, impractical and churlish demand to control the currencies and coins themselves. Cryptos are here to stay and it is a joy to hear that the authorities, in the US at least, are looking for a way to live with them.

Have a good week

Anthony Peters
Bond traders in a trading room